So you have decided to get a new car. First of all, congratulations!
At this stage, you might be thinking about the different ways to fund it. Should you lease or buy – and how do these options differ?
The main difference is that when you lease a car, you are essentially borrowing it for a set period of time and returning it once the contract is over. When you buy a car, on the other hand, you will often need a car loan (unless you have a very substantial amount of cash saved up for purchases like this!). After the loan is paid in full, the car will be yours to keep.
This post will help you get a clearer picture of both choices and will hopefully help you to decide which way to go. Either way, this decision should be taken with due consideration.
Deciding Whether to Lease or Buy a Car
While money tends to be the main factor people think about when weighing the options, there’s more than that to consider. Yes, your financial situation is important – and you should assess that before you commit to either buying or leasing a car – but money isn’t the only factor.
The first step you need to take is to clarify your goals. How much will you use your car, what will you use it for, and for how long are you planning to have it?
There’s no reason to buy a car if you know you’ll only need it for a year because you’re moving to a place that offers reliable transportation, for example. There’s also no reason to lease a car if you don’t like the idea of having to give your vehicle back after a few years.
Then, of course, ask yourself these questions:
- What monthly payments can I afford?
- Is my income steady?
- How is my emergency fund doing?
Once you answer these questions, you will have a clearer picture of your current financial situation. This will, in turn, help you choose an option that fits your lifestyle and budget.
The next step is to weigh all of the pros and cons of the lease vs. buy car question. That way, you will be able to make an informed decision which you are less likely to regret.
Pros and Cons of Leasing A Car
No one option is better than the other, and the right choice for you depends on your situation and needs. Before you make the final decision on whether you will lease or buy your next car, you should gather as much information as possible.
Let’s first go through all the pros and cons of leasing vs. buying a car.
Pros of Leasing a Car
- Lower monthly payments. Car lease monthly payments are typically lower than those for a car loan, and there is no down payment involved. If you are on a tight budget monthly, this might be the better option for you.
- Fewer repair costs. Leased vehicles are usually under warranty so you can forget about unplanned repair bills. This doesn’t mean you don’t need to take good care of the car, but there will be fewer expenses involved.
- You won’t have to go through the trouble of selling a vehicle. Once your lease contract is over, you can return your car and pick a new one; no hassle, no time wasted.
- There’s no need to get approved for a loan. Leasing companies don’t go through your credit history as meticulously as banks do when applying for a car loan.
- You can get a new car more often. Depending on your lease contract duration, you can drive the latest model car every few years.
- The overall process is less complicated. Getting a car loan and buying a new car can be quite time-consuming. On the other hand, the car leasing process can be quite simple and straightforward. Just find the right dealer, go through the terms of the contract, and sign it.
Cons of Leasing a Car
- There might be fees included. Make sure to check your lease contract for any fees. There can be fees for late payments, end of contract fees, or driving more miles than listed in the contract.
- Insurance might be higher. In most cases, compulsory liability insurance will not be enough, and you will be asked to get gap insurance, which is optional when buying a car.
- The car is never yours. Leasing a car is nothing more than renting it for a fixed period of time. You pay monthly to use it, but once the contract is over, you are left with nothing but sweet memories.
- You will need to prove a stable income. Leasing a car is a financial responsibility. At the very least, you will have to cover the monthly payments, so make sure you have enough in your emergency fund to cover unexpected expenses. The leasing company might also ask you for some proof of income.
Pros and Cons of Buying A Car
Now that you know more about leasing a car, let’s have a look at the other option. Buying your car might seem like the best option for many, but like everything else, it has its pros and cons.
Here is a list of things to consider. Check them out so you can make sure you are making the right decision.
Pros of Buying a Car
- You can sell it when you want to. You have the complete freedom of selling your car and buying a new one whenever you feel like it. No need to wait for the contract to finish.
- You’ll save money in the long term. Even though car loan monthly payments are typically higher than those of leasing a car, in the long run, you save money. Once you are done paying the loan, the vehicle is yours, and you can sell it.
- No risk of lease-end charges. There are no extra fees when buying a car, and you don’t need to stick to the contract term to avoid additional charges.
- You can drive as much as you like. Leasing contracts usually have a mileage cap, which is not applicable if you buy a car. If you are planning on doing quite a bit of driving, buying might be the better option for you. You also won’t need to worry about a spontaneous road trip!
- You’re the owner of your car! When you purchase a vehicle, it is yours. It can be quite satisfying to have a vehicle that is entirely yours, especially if it’s your first car.
- You can modify the car as you please. Since the vehicle is yours, you can change it as much as you want, unlike with a leased car. You also don’t need to worry about your kids spilling milk on the backseat.
Cons of Buying a Car
- Repair costs after the end of the warranty. If you buy a new car, you will most likely get a manufacturer’s warranty, but once the term is over, you will have to cover all of the repair costs. You can avoid these costs by getting premium insurance, but it will drive up your premium.
- Higher monthly payments. Car loan monthly payments are usually higher than leasing. If you are looking to minimize your monthly expenses, buying a car might not be the best solution.
- The process is more complicated. It might take some time to get a car loan approved, and if your credit record is not stellar, you might have to pay higher interest rates. Then there is the vehicle registration process that is handled by the DMV. As you can imagine, this might take quite a bit of time.
Is It Better To Lease Or Buy A Car?
There are many differences between buying and leasing a car. Ultimately, the decision should be based on your goals, financial situation, and family needs.
After considering all the pros and cons, we can now have a look at how leasing a car is a better short term option, while buying one is more worth it in the long run.
Best Short-Term Option: Leasing a Car
If you are looking for a short term car, leasing is the best option available. This is especially true if you go to a new city for a year or two for work and you know you are going to be leaving after that term.
In such cases, leasing a car is much more worth it. Once the time is up, you don’t need to worry about selling it. It also takes the repairs headache away. It can also be a better choice if you enjoy driving new cars. Get a leasing contract for a year or two and change the car once it is over.
Best Long-Term Option: Buying a Car
If you are thinking long term, buying a car is the way to go. Even though monthly payments for a car loan might be higher, once you finish paying them, the vehicle is yours. If you are financially stable and want to get a car for more than a few years, buying has its benefits.
You will not only save money but also will be able to personalize it to your needs and lifestyle. Besides, if your situation changes, for example, a new family member joins the team, you can always sell it and buy a new one.
Use our auto loan calculator to figure out how much car you can afford on your budget!
Buying or Leasing – Insurance Either Way
Whether you decided to buy or lease a car, the first thing you should do is to get it insured. Check your state’s requirements for the minimum insurance policy, and the lease or financing contract to see if there are any specific insurance requirements.
In most cases, leasing companies will set specific clauses for how much insurance you need to get. It is also important to consult an insurance professional to make sure you choose the right policy for your situation.